Monopolistic Competition and Oligopoly - Weeblyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/mono_comp...a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY

25 - 1 Copyright McGraw-Hill/Irwin, 2002

Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly

Oligopolies and Mergers

Three Oligopoly Models

Kinked-Demand Theory

Cartels and Collusion

Price Leadership

Oligopoly and Efficiency

Key Terms

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Monopolistic

Competition

and Oligopoly

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Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Market Structure Continuum

Pure

Competition

Pure

Monopoly Monopolistic

Competition Oligopoly

FOUR MARKET MODELS Monopolistic Competition:

•Relatively Large

Number of Sellers

•Differentiated Products

•Easy Entry and Exit




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Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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CHARACTERISTICS

Relatively Large Number

of Sellers

•Small Market Shares

•No Collusion

•Independent Action





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Differentiated Products • Product Attributes

• Service

• Location

• Brand Names and

Packaging

• Some Control Over Price

Role of Advertising

CHARACTERISTICS





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR

P1

ATC P

rice a

nd

Co

sts

Q1

Economic

Profits

Expect New Competitors

PRICE AND OUTPUT IN

MONOPOLISTIC COMPETITION

Quantity

A1

MC





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR

P1

ATC P

rice a

nd

Co

sts

Q1

Economic

Profits

Expect New Competitors

PRICE AND OUTPUT IN


Quantity

A1

New competition drives down the

price level – leading to economic

losses in the short run

MC





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR

MC

P2

ATC P

rice a

nd

Co

sts

Q2

Economic

Losses

PRICE AND OUTPUT IN


Quantity

A2





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR

MC

P2

ATC P

rice a

nd

Co

sts

Q2

Economic

Losses

PRICE AND OUTPUT IN


Quantity

A2 With economic losses, firms will

exit the market – Stability occurs

when economic profits are zero





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR

MC

P3

= A3

ATC P

rice a

nd

Co

sts

Q3

PRICE AND OUTPUT IN


Quantity

Long-Run Equilibrium Normal

Profit

Only





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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AND EFFICIENCY

• Not Productively Efficient

Minimum ATC

• Not Allocatively Efficient

Price MC

Graphically…






Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR

MC

P3

= A3

ATC P

rice a

nd

Co

sts

Q3

Quantity

Long-Run Equilibrium Price is Not

= Minimum

ATC

Price MC


AND EFFICIENCY





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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AND EFFICIENCY

Product Variety

• Benefits of Product Variety

• Nonprice Competition

• Advertising Role

• Trial & Error Search for

Maximum Profits





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Show Market Structure Continuum

Pure

Competition

Pure

Monopoly Monopolistic

Competition Oligopoly

FOUR MARKET MODELS Oligopoly: •A Few Large Producers

•Homogeneous or

Differentiated Products

•Control Over Price, But

Mutual Interdependence

•Entry Barriers





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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OLIGOPOLIES AND MERGERS

Mergers

Measures of Industry

Concentration

•Concentration Ratio

•Localized Markets

•Interindustry Competition

•World Trade

•Import Competition





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Herfindahl Index Sum of the squared percentage market

shares for all firms in the industry –

Places greater weight upon the larger

firms

(%s1)2 + (%s2)

2 + (%s3)2 + … + (%sn)2

A greater Herfindahl Index

indicates a greater concentration

of market power in the industry

(Pure competition is near zero)





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Mutual Interdependence

Collusive Tendencies

•Collusion

Incentive to Cheat




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Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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No Standard Model due to...

Diversity of Oligopolies

Complications of

Interdependence

1 - Kinked Demand Curve

2 - Collusive Pricing

3 - Price Leadership

THREE OLIGOPOLY MODELS

Alternative Models:





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D1

MR1 Quantity

The firm’s demand and

marginal revenue curves

KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY

Pri

ce





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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MR2 D1

D2

MR1 Quantity

The rival’s demand and

marginal revenue curves


Pri

ce





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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MR2 D1

D2

MR1 Quantity


Pri

ce

Rivals tend to

follow a price cut





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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MR2 D1

D2

MR1 Quantity


Pri

ce

Rivals tend to

follow a price cut

or ignore a

price increase





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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MR2 D1

D2

MR1 Quantity

Effectively creating

a kinked demand curve


Pri

ce





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

Quantity




Pri

ce





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR Quantity




Pri

ce





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR Quantity

Profit maximization

MR = MC occurs

at the kink


Pri

ce





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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D

MR Quantity

This behavior can set

off a price war


Pri

ce





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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If a few firms face identical

or highly similar demand

and costs...

Oligopoly is conducive to

collusion

They will tend to seek joint

profit maximization...

CARTELS AND OTHER COLLUSION

Graphically…





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Colluding Oligopolists Will

Split the Monopoly Profits

D

MC

ATC

MR

Economic

Profit

MR = MC

Pri

ce a

nd

co

sts

Q0

P0

A0






Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Overt Collusion

•Cartel

•OPEC

Covert Collusion

•Recent Examples

•Tacit Understandings







Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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Obstacles to Collusion

•Demand and Cost

Differences

•Number of Firms

•Cheating

•Recession

•Potential Entry

•Antitrust Law






Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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PRICE LEADERSHIP MODEL

Leadership Tactics

•Infrequent Price

Changes

•Communications

•Limit Pricing

Breakdowns in Price

Leadership





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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OLIGOPOLY AND ADVERTISING

Less Easily Duplicated

Adequate Resources

Positive Effects of

Advertising

Potential Negative

Effects of Advertising

Brand Development





Monopolistic

Competition

Characteristics

Price and Output in

Monopolistic

Competition

Monopolistic

Competition and

Efficiency

Oligopoly





Price Leadership


Key Terms

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OLIGOPOLY AND EFFICIENCY

•Not Productively

Efficient

Minimum ATC

• Not Allocatively

Efficient

Price MC




Documents

Monopolistic Competition and Oligopoly - Weeblyrushsocialstudies.weebly.com/uploads/2/3/4/8/23482486/mono_comp...a kinked demand curve KINKED DEMAND THEORY: NONCOLLUSIVE OLIGOPOLY